Friday, February 27, 2009

Berkshire Hathaway and its chairman, Warren Buffett, are certainly bearing the brunt of this bear market in shares. Last week, Bloomberg reported that Berkshire Hathaway shares had fallen to a five-year low on concern about possible losses and writedowns from "bets the billionaire chairman has taken on world stock markets."

Berkshire won't have to pay out on the contracts until "at least" 2019, but falling stock market prices and increased volatility in the interim require the company to take quarterly writedowns on those positions. Today, Bloomberg reports that writedowns from those derivative bets, along with losses in the company's stock portfolio, may cause Berkshire to report its worst results ever, according to the gauge most touted by Buffett: the company's book value per share."Berkshire Hathaway Inc. may report its worst results since Warren Buffett took over in 1965, based on a measure the billionaire chairman cites on the first page of his firm’s annual letter to shareholders.

Losses in Berkshire’s stock portfolio and writedowns on derivative bets tied to equity markets may have caused book value per share, a measure of assets minus liabilities, to fall by 8.5 percent, according to Gary Ransom, an analyst with Fox- Pitt Kelton Cochran Caronia Waller. That ratio declined only once before on Buffett’s watch, falling 6.2 percent in 2001.

Berkshire suffered as the benchmark Standard & Poor’s 500 Index turned in its worst year since 1937. The expected writedown on derivatives may reflect both that decline and the increasing volatility of equity markets, though the $35.5 billion in derivative contracts don’t require Omaha, Nebraska- based Berkshire to pay out until at least 2019, if at all..."The article goes on to explain the importance that this book value per share measure has to Berkshire shareholders: "...If Buffett’s 2008 report, expected tomorrow, follows the template from past years, the first sentence of the letter to shareholders will disclose the change in book value. In his “owner’s manual” for Berkshire shareholders, Buffett says he considers the figure to be an objective substitute for the best, albeit subjective, measure of a firm’s success: a metric he calls intrinsic value." Read on for more on Berkshire and the importance of this intrinsic value measurement. You can also check out the links below to find the upcoming (8 a.m. Saturday) Berkshire Hathaway annual report, and a 2008 discussion with investor Warren Buffett.